In a competitive global economy many countries around the world try to strengthen their own economies by creating domestic job growth. One way to accomplish that is by providing tax breaks to certain industries who export their products or services.
Here’s a brief list of the types of businesses that may qualify here in the US:
- Companies that export finished goods manufactured in the US.
- Companies that manufacture products that are components in other products and are ultimately exported.
- Software companies that develop their software in the US and sell them overseas.
- Architectural or engineering firms providing services in the US for construction projects done outside the US.
The tax benefit available to these businesses here in the US is known as Interest Charge Domestic International Sales Corporation, or IC-DISC for short. By having this tax strategy in place qualifying US companies can save taxes on up to 50% of the company’s profits from exports. To use a simple example assume that a manufacturer exports 40% of their products and their overall taxable income is $2,000,000 so profits from exports are $800,000. Based on the IC-DISC structure 50% of this exports profit qualifies for the tax benefit, or $400,000. The dollar for dollar tax savings is around 20% of the qualifying exports profits, or $80,000 ($2,000,000 x 40% x 50% x 20%). To make it even simpler the tax savings are roughly 10% of profits generated from exports ($800,000 x 10% = $80,000).
As with most tax saving strategies the calculations are not straightforward and the proper structure needs to be in place first. This is why it helps having a knowledgeable CPA helping you with this strategy. Hani Sharestan, CPA, MST, is the international tax partner at Wright Ford Young & Co. and has helped many companies understand and implement this strategy.
Hani can be reached at 949-910-2727, or at hani@cpa-wfy.com.